ShoreTel, Inc.
ShoreTel Inc (Form: 10-Q, Received: 11/09/2009 15:59:39)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-33506

 

 

SHORETEL, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   77-0443568

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

960 Stewart Drive, Sunnyvale, California   94085-3913
(Address of principal executive offices)   (Zip Code)

(408) 331-3300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   x

As of November 3, 2009, 44,457,332 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

SHORETEL, INC. AND SUBSIDIARIES

FORM 10-Q for the Quarter Ended September 30, 2009

INDEX

 

          Page
PART I: Financial Information    3
Item 1    Financial Statements (Unaudited)    3
   Condensed Consolidated Balance Sheets as of September 30, 2009 and June 30, 2009    3
  

Condensed Consolidated Statements of Operations for the three months ended September 30, 2009 and 2008 ( As restated)

   4
  

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2009 and 2008 (As restated)

   5
   Notes to Condensed Consolidated Financial Statements (As restated)    6
Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations    15
Item 3    Quantitative and Qualitative Disclosures About Market Risk    21
Item 4    Controls and Procedures    21
PART II: Other information    22
Item 1    Legal Proceedings    22
Item 1A    Risk Factors    22
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds    22
Item 3    Defaults Upon Senior Securities    22
Item 4    Submission of Matters to a Vote of Security Holders    22
Item 5    Other Information    22
Item 6    Exhibits    22
   Signatures    23
   Exhibit Index    24

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS (Unaudited)

SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

     Sept. 30,
2009
    June 30,
2009
 
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 82,192      $ 73,819   

Short-term investments

     29,306        33,847   

Accounts receivable, net of allowance of $1,338 and $1,330 as of September 30, 2009 and June 30, 2009, respectively

     18,973        21,454   

Inventories

     13,068        11,805   

Prepaid expenses and other current assets

     3,536        3,110   
                

Total current assets

     147,075        144,035   

PROPERTY AND EQUIPMENT — Net

     4,140        3,475   

OTHER ASSETS

     7,925        8,114   
                

TOTAL

   $ 159,140      $ 155,624   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 6,819      $ 7,774   

Accrued liabilities and other

     5,503        4,494   

Accrued employee compensation

     7,070        4,895   

Deferred revenue

     16,033        15,255   
                

Total current liabilities

     35,425        32,418   

LONG-TERM LIABILITIES:

    

Long-term deferred revenue

     7,581        7,236   

Other long-term liabilities

     2,227        2,198   
                

Total liabilities

   $ 45,233      $ 41,852   
                

COMMITMENTS AND CONTINGENCIES (Note 11)

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock, par value $.001 per share, authorized 5,000; none issued and outstanding

     —          —     

Common stock and additional paid-in capital, par value $.001 per share, authorized 500,000; issued and outstanding, 44,444 and 44,362 shares as of September 30, 2009 and June 30, 2009, respectively

     211,249        209,102   

Deferred stock compensation

     (33     (54

Accumulated other comprehensive income

     229        136   

Accumulated deficit

     (97,538     (95,412
                

Total stockholders’ equity

     113,907        113,772   
                

TOTAL

   $ 159,140      $ 155,624   
                

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three months ended
September 30,
 
     2009     2008
As restated
 

REVENUE:

    

Product

   $ 26,843      $ 30,014   

Support and services

     6,907        5,846   
                

Total revenue

     33,750        35,860   

COST OF REVENUE:

    

Product (1)

     9,533        9,990   

Support and services (1)

     2,584        2,918   
                

Total cost of revenue

     12,117        12,908   

GROSS PROFIT

     21,633        22,952   
                

OPERATING EXPENSES:

    

Research and development (1)

     7,197        7,794   

Sales and marketing (1)

     12,017        11,173   

General and administrative (1)

     4,651        6,047   
                

Total operating expenses

     23,865        25,014   
                

LOSS FROM OPERATIONS

     (2,232     (2,062

OTHER INCOME:

    

Interest income

     106        628   

Other

     22        (196
                

Total other income

     128        432   
                

LOSS BEFORE PROVISION FOR INCOME TAXES

     (2,104     (1,630

PROVISION FOR INCOME TAXES

     (22     (608
                

NET LOSS

   $ (2,126   $ (2,238
                

Net loss per common share

    

Basic

   $ (0.05   $ (0.05
                

Diluted

   $ (0.05   $ (0.05
                

Shares used in computing net loss per share

    

Basic

     44,385        43,318   

Diluted

     44,385        43,318   

 

(1)    Includes stock-based compensation expense as follows:

    

Cost of product revenue

   $ 27      $ 26   

Cost of support and services revenue

     111        198   

Research and development

     638        730   

Sales and marketing

     699        998   

General and administrative

     615        838   
                

Total stock-based compensation expense

   $ 2,090      $ 2,790   
                

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended
September 30,
 
     2009     2008
As restated
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (2,126   $ (2,238

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     644        450   

Amortization (Accretion )of premium/discount on investments

     30        (6

Stock-based compensation expense

     2,090        2,790   

Loss on disposal of property and equipment

     —          65   

Provision for doubtful accounts receivable

     67        1,010   

Changes in assets and liabilities:

    

Accounts receivable

     2,414        783   

Inventories

     (1,263     2,044   

Prepaid expenses and other current assets

     (426     (69

Other assets

     368        (299

Accounts payable

     (868     (809

Accrued liabilities and other

     1,045        144   

Accrued employee compensation

     2,149        (32

Deferred revenue

     1,123        1,862   
                

Net cash provided by operating activities

     5,247        5,695   
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (1,280     (468

Purchases of investments

     (2,031     (8,016

Proceeds from maturities of investments

     6,635        14,174   

Purchase of software license

     (295     (660
                

Net cash provided by investing activities

     3,029        5,030   
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Exercise of common stock options

     97        39   
                

Net cash provided by financing activities

     97        39   
                

NET INCREASE IN CASH AND CASH EQUIVALENTS

     8,373        10,764   

CASH AND CASH EQUIVALENTS — Beginning of period

     73,819        68,672   
                

CASH AND CASH EQUIVALENTS — End of period

   $ 82,192      $ 79,436   
                

NONCASH INVESTING AND FINANCING ACTIVITIES:

    

Vesting of accrued early exercised stock options

   $ 7      $ 32   

Unpaid portion of property and equipment purchases included in period-end accounts payable

   $ 258      $ 160   

Unpaid portion of purchases of other assets included in period-end accounts payable and accrued liabilities

   $ 240      $ —     

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Description of Business

ShoreTel, Inc. and its subsidiaries (referred herein as “the Company”) is a leading provider of Pure Internet Protocol, or IP, unified communications systems for enterprises. The Company’s systems are based on its distributed software architecture and switch-based hardware platform which enable multi-site enterprises to be served by a single telecommunications system. The Company’s systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location. As a result, management believes that the Company’s systems enable enhanced end user productivity and provide lower total cost of ownership and higher customer satisfaction than alternative systems.

2. Basis of Presentation and Significant Accounting Policies

The accompanying financial statements as of September 30, 2009 and for the three months ended September 30, 2009 and 2008 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K/A, Amendment 1 for the fiscal year ended June 30, 2009.

In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present a fair statement of financial position as of September 30, 2009, results of operations for the three months ended September 30, 2009 and 2008, and cash flows for the three months ended September 30, 2009 and 2008, as applicable, have been made. The results of operations for the three months ended September 30, 2009 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Computation of Net Loss per Share

Basic net loss per common share available to common stockholders is determined by dividing net loss available to common stockholders by the weighted average number of common shares available to common stockholders during the period. Diluted net loss per common share available to common stockholders is determined by dividing net loss available to common stockholders by the weighted average number of common shares available to common stockholders used in the basic loss per common share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method. Potentially dilutive securities of 8.0 million and 8.0 million for the three months ended September 30, 2009 and 2008, respectively, were not included in the computation of dilutive net loss per share because to do so would have been anti-dilutive.

Adoption of New Accounting Standards

In the first quarter of fiscal 2010, we adopted the following accounting standards, none of which had a material impact on our financial position, results of operations or cash flows:

 

   

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification”), which is now the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied for financial statements issued for periods ending after September 2009. Additionally, we are using the new guidelines prescribed by the Codification when referring to GAAP, including the elimination of pre-Codification GAAP references unless accompanied by Codification GAAP references.

 

   

The accounting standard for determining whether instruments granted in share-based payment transactions are participating securities.

 

   

The FASB amendment to the authoritative guidance related to the disclosures about fair value of financial instruments which requires publicly-traded companies to provide disclosures on the fair value of financial instruments in interim financial statements.

Accounting Standards Issued But Not Yet Effective

In October 2009, the FASB issued an accounting standards update that revises accounting and reporting requirements for arrangements with multiple deliverables. This update requires the use of an estimated selling price to determine the selling price of a deliverable in cases where neither vendor-specific objective evidence nor third-party evidence is available, which is expected to increase the ability for entities to separate deliverables in multiple-deliverable arrangements and, accordingly, to decrease the amount of revenue deferred in these cases. Additionally, this update requires the total selling price of a multiple-deliverable arrangement to be

 

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Table of Contents

SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

allocated at the inception of the arrangement to all deliverables based on relative selling prices. This update is to be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which for the Company is July 1, 2010. Early adoption is permitted, and if this update is adopted early in other than the first quarter of an entity’s fiscal year, then it must be applied retrospectively to the beginning of that fiscal year. We are currently evaluating the impact of adoption of this update on our financial position, results of operations and cash flows.

In October 2009, the FASB issued an accounting standards update that clarifies which revenue allocation and measurement guidance should be used for arrangements that contain both tangible products and software, in cases where the software is more than incidental to the tangible product as a whole. More specifically, if the software sold with or embedded within the tangible product is essential to the functionality of the tangible product, then this software as well as undelivered software elements that relate to this software is excluded from the scope of existing software revenue guidance, which is expected to decrease the amount of revenue deferred in these cases. This update is to be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which for the Company is July 1, 2010. Early adoption is permitted, but this update must be adopted in the same period as, and use the same transition method that is used for, the update described in the prior paragraph. We are currently evaluating the impact of adoption of this update on our financial position, results of operations and cash flows.

Subsequent Event

The Company has evaluated events and transactions subsequent to September 30, 2009 through November 9, 2009, the date of issuance of Consolidated Financial Statements. During the period from October 1, 2009 to November 9, 2009, the Company did not have any material subsequent events.

3. Balance Sheet Details

Balance sheet components consist of the following:

 

     September 30,
2009
    June 30,
2009
 
     (in thousands)  

Inventories

    

Raw materials

   $ 179      $ 398   

Inventory in process/transit

     679        962   

Finished goods

     12,210        10,445   
                

Total inventories

   $ 13,068      $ 11,805   
                

Prepaid expenses and other current assets:

    

Prepaid expenses

   $ 2,936      $ 2,435   

Deferred cost of revenue

     240        315   

Deferred taxes

     360        360   
                

Total prepaid expenses and other current assets

   $ 3,536      $ 3,110   
                

Property and equipment:

    

Computer equipment and tooling

   $ 6,456      $ 5,281   

Software

     1,091        1,086   

Furniture and fixtures

     1,073        1,064   

Leasehold improvements

     388        387   
                

Total property and equipment

     9,008        7,818   

Less accumulated depreciation and amortization

     (4,868     (4,343
                

Property and equipment — net

   $ 4,140      $ 3,475   
                

Deferred Revenue — current and long-term:

    

Product

   $ 769      $ 988   

Support and services

     22,845        21,503   
                

Total deferred revenue

   $ 23,614      $ 22,491   
                

 

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Table of Contents

SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

The following is a summary of the Company’s long-term other assets (in thousands):

 

     September 30, 2009    June 30, 2009
     Gross
Carrying
Amount
   Accumulated
Amortization
    Net Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
    Net Carrying
Amount

Licensed technology

   $ 1,760    $ (143   $ 1,617    $ 1,760    $ (57   $ 1,703

Purchased technology

     2,843      (79     2,764      2,578      (74     2,504
                                           

Other intangible assets

   $ 4,603    $ (222     4,381    $ 4,338    $ (131     4,207
                                   

Prepaid royalties

          1,954           2,285

Deferred tax asset

          1,388           1,388

Deposits and other

          202           234
                       

Total other assets

        $ 7,925         $ 8,114
                       

Short-term Investments:

The following tables summarize the Company’s short-term investments (in thousands):

 

As of September 30, 2009

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

Corporate notes and commercial paper

   $ 19,580    $ 148    $ (1   $ 19,727

US Government agency securities

   $ 9,497    $ 82      —        $ 9,579
                            

Total

   $ 29,077    $ 230    $ (1   $ 29,306
                            

As of June 30, 2009

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

Corporate notes and commercial paper

   $ 24,209    $ 111      —        $ 24,320

US Government agency securities

     9,502      25      —          9,527
                            

Total

   $ 33,711    $ 136    $ —        $ 33,847
                            

The following table summarizes the maturities of the Company’s fixed income securities (in thousands):

 

As of September 30, 2009

   Amortized
Cost
   Fair
Value

Less than 1 year

   $ —      $ —  

Due in 1 to 3 years

     29,077      29,306
             

Total

   $ 29,077    $ 29,306
             

As of June 30, 2009

   Amortized
Cost
   Fair
Value
             

Less than 1 year

   $ 6,646    $ 6,677

Due in 1 to 3 years

     27,065      27,170
             

Total

   $ 33,711    $ 33,847
             

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

4. Fair Value Disclosure

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

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SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

   

Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

 

   

Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The table below sets forth the Company’s cash equivalents and short-term investments measured at fair value on a recurring basis (in thousands):

 

     As of September 30, 2009

Assets

   Level 1    Level 2    Level 3    Total

Money market funds

   $ 67,596    $ —      $ —      $ 67,596

Corporate notes and commercial paper

     —        19,727      —        19,727

US Govt. agency securities

     —        9,579      —        9,579
                           
   $ 67,596    $ 29,306    $ —      $ 96,902
                           

The above table excludes $14.6 million of cash balances on deposit at banks.

5. Income Taxes

In the three months ended September 30, 2009, the Company recorded an income tax provision of $22,000 compared to an income tax provision of $0.6 million for the three months ended September 30, 2008.

The income tax provision of $22,000 for the three months ended September 30, 2009 represents the tax provision for the profitable jurisdictions based upon income earned during the period while no tax benefit was accrued on the loss jurisdictions. The income tax provision for the three months ended September 30, 2008 of $0.6 million was calculated under the discrete method as management determined that an annual effective tax rate method would not provide a reliable estimate. The negative effective tax rate of (37%) is primarily a result of nondeductible stock compensation expenses, limitations on the utilization of credit carry forward and the impact of the valuation allowance.

The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008”, was signed into law on October 3, 2008. Under the Act, the research credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. The Company has calculated its federal R&D credit accordingly.

We maintain liabilities for uncertain tax positions. As of September 30, 2009, the Company’s total amount of unrecognized tax benefits were $1.7 million as compared to $1.5 million as of June 30, 2009, representing an increase of $0.2 million for the first three months of fiscal 2010. The increase in the total unrecognized tax benefits is primarily due to California research tax credits. None of the total unrecognized tax benefits of the Company, if recognized, would impact the effective tax rate, as the Company has a full valuation allowance on its carryforward attributes.

While management believes that the Company has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.

The Company’s only major tax jurisdiction is the United States. The tax years 2000 through 2008 remain open and subject to tax examination by the appropriate governmental agencies in the United States.

 

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SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

6. Common Stock

Common Shares Reserved for Issuance

At September 30, 2009, the Company has reserved shares of common stock for issuance as follows (in thousands):

 

Reserved under stock option plans

   11,017

Reserved under employee stock purchase plan

   677

Conversion of warrants

   2
    

Total

   11,696
    

7. Stock-Based Compensation

The Company estimated the grant date fair value of stock option awards and Employee Stock Purchase Plan (ESPP) rights using the Black-Scholes option valuation model with the following assumptions:

 

     Three Months Ended
September 30, 2009
    Three Months Ended
September 30, 2008
 

Expected life of option plan

   6.08-6.46 years      6.08-6.46 years   

Expected life of ESPP right

   0.50 years      0.50 years   

Risk-free interest rate for option plan

   2.47   3.11

Risk-free interest rate for ESPP right

   0.27   1.93

Volatility for option plan

   58   59

Volatility for ESPP right

   138   136

Dividend yield

   0   0

During the three months ended September 30, 2009 and 2008, the Company recorded non-cash stock-based compensation expense of $2.1 million and $2.8 million respectively, net of forfeitures.

Compensation expense is recognized only for the portion of stock options that are expected to vest, assuming an expected forfeiture rate in determining stock-based compensation expense, which could affect the stock-based compensation expense recorded if there is a significant difference between actual and estimated forfeiture rates. The estimated forfeiture rate for the three months ended September 30, 2009 and 2008 was 11.5% and 9.7%, respectively. As of September 30, 2009, total unrecognized compensation cost related to stock-based awards granted to employees and non-employee directors was $23.0 million, net of estimated forfeitures of $7.6 million. This cost will be amortized on a ratable basis over a weighted-average vesting period of approximately three years.

8. Stock Option Plan

In January 1997, the Board of Directors and stockholders adopted the 1997 stock option plan (the “1997 Plan”) which, as amended, provides for granting incentive stock options (“ISOs”) and nonqualified stock options (“NSOs”) for shares of common stock to employees, directors, and consultants of the Company. In September 2006, the Company’s board of directors increased the number of shares authorized and reserved for issuance under the 1997 Plan to 10,513,325 shares of common stock. In accordance with the 1997 Plan, the stated exercise price shall not be less than 100% and 85% of the estimated fair market value of common stock on the date of grant for ISOs and NSOs, respectively, as determined by the Board of Directors. The 1997 Plan provides that the options shall be exercisable over a period not to exceed ten years. Options generally vest ratably over four years from the date of grant. Options granted to certain executive officers are exercisable immediately and unvested shares issued upon exercise are subject to repurchase by the Company at the exercise price (“Class Two Options”). During the three months ended September 30, 2009 and September 30, 2008, zero and 1,167 unvested shares were repurchased, respectively. The Company’s repurchase right for such options lapses as the options vest, generally over four years from the date of grant.

In February 2007, the Company adopted the 2007 Equity Incentive Plan (the “2007 Plan”) which, as amended, provides for grants of ISOs, NSOs, restrictive stock units (“RSUs”) and restrictive stock awards (“RSAs”) to employees, directors and consultants of the Company. This plan serves as the successor to the 1997 Plan, which terminated in January 2007. Five million shares of common stock were initially reserved for future issuance in the form of stock options, restricted stock awards or units, stock appreciation rights and stock bonuses. In February 2008, pursuant to the automatic increase provisions of the 2007 Plan, the Company’s board of directors increased the number of shares authorized and reserved for issuance under the 2007 Plan by 2.1 million and 2.2 million in 2008 and 2009, respectively.

 

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SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Class Two Options granted under the 1997 Plan to certain executive officers are exercisable immediately and shares issued upon exercise are subject to repurchase by the Company at the exercise price, in the event the employee is terminated; such repurchase right lapses gradually over a four year period. The Company does not consider the exercise of stock options substantive when the issued stock is subject to repurchase. Accordingly, the proceeds from the exercise of such options are accounted for as a deposit liability until the repurchase right lapses, at which time the proceeds are reclassified to permanent equity. As of September 30, 2009 and June 30, 2009, there were 13,126 and 20,626 shares subject to repurchase, respectively, of the Company’s common stock outstanding and $12,000 and $19,000, respectively, of related recorded liability, which is included in accrued liabilities.

Transactions under the 1997 and 2007 Option Plans are summarized as follows:

 

     Shares
Available
for Grant
    Shares
Subject to
Options
Outstanding
    Weighted-
Average
Exercise

Price
     (Amounts in thousands, except per share amounts)

Outstanding — June 30, 2009

   3,359      7,256      $ 4.19

Termination of remaining shares available for grant under the 1997 Option Plan and other non-plan options

   (22   —          —  

Options granted — (weighted average grant date fair value of $3.18 per share)

   (397   397        6.68

Options exercised

   —        (66     1.50

Options canceled

   183      (183     4.74

Restricted stock awards (see Note 10)

   (123    

Restricted stock cancelled

   9       
          

Outstanding — September 30, 2009

   3,009      7,404      $ 4.31
              

Options exercisable at September 30, 2009

     2,087      $ 2.38
          

The total pre-tax intrinsic value for options exercised in the three months ended September, 2009 and 2008 was $0.4 million and $0.4 million, respectively, representing the difference between the estimated fair values of the Company’s common stock underlying these options at the dates of exercise and the exercise prices paid. There were 22,000 cancelled options that expired under the 1997 Option Plan due to the termination of that plan. These cancelled, expired options have been included in the option activity for the three months ended September 30, 2009.

The following table summarizes information about outstanding and exercisable options at September 30, 2009:

 

Exercise

Prices

   Options
Outstanding
   Weighted
Average
Remaining
Contractual
Life (Years)
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic

Value
     (Amounts in thousands, except years and per share data)

$0.10 — 0.40

   734    5.01    $ 0.31   

$0.80 — 1.00

   433    6.19      0.87   

$2.00 — 3.20

   569    6.92      3.12   

$3.50 — 4.56

   458    8.74      3.92   

$4.82

   3,018    6.37      4.82   

$4.93 — 5.08

   812    8.43      4.96   

$5.25 — 6.08

   788    8.72      5.59   

$6.50 — 8.29

   400    9.87      6.69   

$11.30 — 11.40

   169    7.60      11.36   

$12.55 — 13.73

   19    7.93      13.12   

$15.41

   4    8.12      15.41   
             

Total Outstanding

   7,404    6.80      4.31    $ 22,801
             

Exercisable

   2,087    5.21      2.38      7,922

Vested and expected to vest

   6,492    6.92    $ 4.22    $ 24,009

9. Employee Stock Purchase Plan

        On September 18, 2007, the Board of Directors approved the commencement of offering periods under a previously-approved employee stock purchase plan (the “ESPP”). The ESPP allows eligible employees to purchase shares of Company stock at a discount through payroll deductions. The ESPP consists of six-month offering periods commencing on May 1 st and November 1 st , each year. Employees purchase shares in the purchase period at 90% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the offering period, whichever price is lower.

 

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SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

On February 3, 2009 and February 6, 2008, pursuant to the automatic increase provisions of the ESPP, the Company’s Board of Directors approved increases to the number of shares authorized and reserved for issuance under the ESPP by 438,000 shares and 427,000 shares, respectively, pursuant to the terms of that plan.

As of September 30, 2009, 688,000 shares had been issued under the ESPP and 677,000 shares had been reserved for future issuance.

10. Restricted Stock

Under the 2007 Plan, during the three months ending September 30, 2009, the Company issued restricted stock awards to non-employee directors electing to receive them in lieu of an annual cash retainer.

In addition, restricted stock units can be issued under the 2007 Plan to eligible employees, and generally vest 25% at one year or 50% at two years from the date of grant and 25% annually thereafter.

Restricted stock award and restricted stock unit activity for the three months ended September 30, 2009 and 2008 is as follows (in thousands):

 

     Three Months Ended
September 30, 2009
    Three Months Ended
September 30, 2008
 

Beginning balance

   507      70   

Awarded

   123      416   

Released

   (19   (12

Forfeited

   (5   —     
            

Ending balance

   606      474   
            

Information regarding restricted stock units outstanding at September 30, 2009 is summarized below:

 

     Number of
Shares
(thousands)
   Weighted
Average
Remaining
Contractual
Life
   Aggregate
Intrinsic Value
(thousands)

Shares outstanding

   606    1.81 years    $ 4,717

Shares vested and expected to vest

   488    1.70 years    $ 3,808

11. Litigation, Commitments and Contingencies

Litigation — The Company is a party to the following material litigation:

U.S. Federal Court Class Action Litigation . On January 16, 2008, a purported stockholder class action lawsuit captioned Watkins v. ShoreTel, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company, certain of its officers and directors, and the underwriters of the Company’s initial public offering. A second purported class action alleging the same claims was filed on January 29, 2008 and the lawsuits were consolidated. A second consolidated amended class action complaint was subsequently filed on March 2, 2009. The consolidated action is purportedly brought on behalf of those who purchased the Company’s common stock pursuant to the initial public offering on July 3, 2007, purports to allege claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. Management believes that the Company has meritorious defenses to these claims and intends to defend the litigation vigorously. It is not possible for the Company to quantify the extent of the potential liability, if any. As such, no liability for any potential loss has been accrued as of September 30, 2009.

California State Court Derivative Action . On January 30, 2008, a purported shareholder derivative lawsuit captioned Berkovitz v. Combs, et al., was filed in the Superior Court of the State of California, County of Santa Clara, against the Company (as a nominal defendant), its directors and certain officers. The complaint purports to allege claims for breach of fiduciary duty and other claims and seeks unspecified compensatory damages and other relief based on essentially the same allegations as the class action litigation. On May 6, 2008, the parties stipulated to, and the Court entered an order for, a temporary standstill of the case. It is not possible for the Company to quantify the extent of the potential liability, if any. As such, no liability for any potential loss has been accrued as of September, 2009.

 

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SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

The Company could become involved in litigation from time to time relating to claims arising out of the ordinary course of business or otherwise. Any litigation, regardless of outcome, is costly and time-consuming, can divert the attention of management and key personnel from business operations and deter distributors from selling the Company’s products and dissuade potential customers from purchasing the Company’s products.

Leases — The Company leases its facilities under noncancelable operating leases which expire at various times through 2015. The leases provide for the lessee to pay all cost of utilities, insurance, and taxes. Future minimum lease payments under the noncancelable leases as of September 30, 2009, are as follows (in thousands):

 

Years Ending June 30,

    

2010 (remaining 9 months)

   $ 1,082

2011

     1,410

2012

     1,332

2013

     1,166

2014

     1,112

2015

     280
      

Total

   $ 6,382
      

Lease obligations for the Company’s foreign offices are denominated in foreign currencies, which were converted herein to U.S. dollars at the interbank exchange rate on September 30, 2009.

Rent expense for the three months ended September 30, 2009 and 2008 was $0.3 million and $0.4 million respectively.

Purchase commitments — As of September 30, 2009 and June 30, 2009, the Company had purchase commitments with contract manufacturers for inventory and with technology firms for usage of software licenses totaling approximately $17.7 million and $11.9 million, respectively.

Indemnification — Under the indemnification provisions of the Company’s customer agreements, the Company agrees to indemnify and defend its customers against infringement of any patent, trademark, or copyright of any country or the misappropriation of any trade secret, arising from the customers’ legal use of the Company’s services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customers under pertinent agreements. However, certain indemnification provisions potentially expose the company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company or its customers pertaining to such indemnification provisions and no amounts have been recorded.

The Company also has entered into customary indemnification agreements with each of its officers and directors. The Company also has indemnification obligations to the underwriters of its initial public offering pursuant to the underwriting agreement executed in connection with that offering. As a result, the Company may have indemnification obligations to its officers, directors and underwriters in connection with the above-referenced securities-related litigation.

12. Segment Information

The Company is organized as, and operates in, one reportable segment: the development and sale of IP voice communication systems. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of evaluating financial performance and allocating resources, accompanied by information about revenue by geographic regions. The Company’s assets are primarily located in the United States of America and not allocated to any specific region and it does not measure the performance of its geographic regions based upon on asset-based metrics. Therefore, geographic information is presented only for revenue. Revenue by geographic region is based on the ship to address on the customer order.

The following presents total revenue by geographic region (in thousands):

 

     Three Months Ended
September 30,
     2009    2008

United States

   $ 30,495    $ 33,609

International

     3,255      2,251
             

Total

   $ 33,750    $ 35,860
             

 

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SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

13. Restatement of Previously Issued Consolidated Financial Statements

Subsequent to the issuance of the unaudited Condensed Consolidated Financial Statements for the fiscal quarter ended September 30, 2008, the Company identified an error in stock-based compensation. The error was identified after the Company’s third-party software provider notified its clients, including the Company, that it made a change to how its software program calculates stock-based compensation expense. Specifically, the prior version of this software calculated stock-based compensation expense by incorrectly continuing to apply a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date rather than reflecting actual forfeitures as vested. Thus, this accounting error relates to the timing of stock-based compensation expense.

The Company determined that stock-based compensation expense error related to the three months ended September 30, 2008 was $78,000.

The following tables present the effect of the restatement adjustments by financial statement line item for Statement of Operations and Consolidated Statement of Cash Flows.

Consolidated Statement of Operations (in thousands, except per share amounts):

 

     Three months ended
September 30, 2008
 
     As
previously
reported
    As restated  

Cost of Revenue:

    

Product

   $ 9,986      $ 9,990   

Support and services

     2,914        2,918   
                

Total cost of revenue

     12,900        12,908   

Gross Profit

     22,960        22,952   
                

Operating Expenses:

    

Research and development

     7,786        7,794   

Sales and marketing

     11,148        11,173   

General and administrative

     6,010        6,047   
                

Total operating expenses

     24,944        25,014   
                

Loss from operations

     (1,984     (2,062
                

Loss before provision for income taxes

     (1,552     (1,630
                

Net loss

   $ (2,160   $ (2,238
                

Basic net loss per common share

   $ (0.05   $ (0.05

Diluted net loss per common share

   $ (0.05   $ (0.05

Consolidated Statements of Cash Flows (in thousands):

 

     Three months ended
September 30, 2008
 
     As
previously
reported
    As restated  

Net loss

   $ (2,160   $ (2,238

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Stock-based compensation expense

     2,712        2,790   
                

Net cash provided by operating activities

     5,695        5,695   

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed above in the section entitled “Risk Factors.”

The following discussion reflects the effects of the restatement discussed in Item 1 note 13 – Restatement of Previously Issued Consolidated Financial Statements to the Consolidated Financial Statements.

Overview

We are a leading provider of IP telecommunications solutions for enterprises. Our solution is comprised of our ShoreGear switches, ShorePhone IP phones and ShoreWare software applications. We were founded in September 1996 and shipped our first system in 1998. We have continued to develop and enhance our product line since that time. We currently offer a variety of models of our switches and IP phones.

We sell our products primarily through channel partners that market and sell our systems to enterprises across all industries, including to small, medium and large companies and public institutions. We believe our channel strategy allows us to reach a larger number of prospective enterprise customers more effectively than if we were to sell directly. The number of our authorized channel partners has more than doubled since June 30, 2004 to over 700 as of September 30, 2009. Channel partners typically purchase our products directly from us. Our internal sales and marketing personnel support these channel partners in their selling efforts. In some circumstances, the enterprise customer will purchase products directly from us, but in these situations we typically compensate the channel partner for its sales efforts. At the request of the channel partner, we often ship our products directly to the enterprise customer.

Most channel partners generally perform installation and implementation services for the enterprises that use our systems. In most cases, our channel partners provide the post-contractual support to the enterprise customer by providing first-level support services and purchasing additional services from us under a post-contractual support contract. For channel partners without support capabilities or that do not desire to provide support, we offer full support contracts to provide all of the support to enterprise customers.

We outsource the manufacturing of our products to contract manufacturers. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain a manufacturing operation. Our phone and switch products are manufactured by contract manufacturers located in California and in China. Our contract manufacturers provide us with a range of operational and manufacturing services, including component procurement, final testing and assembly of our products. We work closely with our contract manufacturers to manage the cost of components, since our total manufacturing costs are directly tied to component costs. We regularly provide forecasts to our contract manufacturers, and we order products from our contract manufacturers based on our projected sales levels well in advance of receiving actual orders from our enterprise customers. We seek to maintain sufficient levels of finished goods inventory to meet our forecasted product sales with limited levels of inventory to compensate for unanticipated shifts in sales volume and product mix.

Although we have historically sold our systems primarily to small and medium sized enterprises, we expanded our sales and marketing activities to increase our focus on larger enterprise customers. Accordingly, we have a major accounts program whereby our sales personnel assist our channel partners to sell to large enterprise accounts, and we coordinate with our channel partners to enable them to better serve large multi-site enterprises. To the extent we are successful in penetrating larger enterprise customers, we expect that the sales cycle for our products will increase, and that the demands on our sales and support infrastructure will also increase.

We are headquartered in Sunnyvale, California and the majority of our personnel work at this location. Sales and support personnel are located throughout the United States and, to a lesser extent, in the United Kingdom, Germany, Belgium, Spain, Hong Kong, Singapore and Australia. Most of our enterprise customers are located in the United States. Revenue from international sales has been less than 10% of our total revenue for the three months ended September 2009 and 2008, respectively. Although we intend to focus on increasing international sales, we expect that sales to enterprise customers in the United States will continue to comprise the significant majority of our sales.

Key Business Metrics

We monitor a number of key metrics to help forecast growth, establish budgets, measure the effectiveness of sales and marketing efforts and measure operational effectiveness.

Initial and repeat sales orders. Our goal is to attract a significant number of new enterprise customers and to encourage existing enterprise customers to purchase additional products and support. Many enterprise customers make an initial purchase and deploy

 

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additional sites at a later date, and also buy additional products and support as their businesses expand. As our installed enterprise customer base has grown we have experienced an increase in revenue attributable to existing enterprise customers, which currently represents a significant portion of our total revenue.

Deferred revenue . Deferred revenue relates to the timing of revenue recognition for specific transactions based on service, support, specific commitments and other factors. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s transactions described above and are recognized as the revenue recognition criteria are met. Nearly all system sales include the purchase of post-contractual support contracts with terms of up to five years, and the rate of renewal on these contracts have been high historically. We recognize support revenue on a ratable basis over the term of the support contract. Since we receive payment for support in advance of our recognizing the related revenue, we carry a deferred revenue balance on our consolidated balance sheet. This deferred revenue helps provide predictability to our future support and services revenue. Accordingly, the level of purchases of post-contractual support with our product sales is an important metric for us along with the renewal rates for these services. Our deferred revenue balance at September 30, 2009 was $23.6 million, consisting of $0.8 million of deferred product revenue and $22.8 million of deferred support and services revenues, of which $16.0 million is expected to be recognized within one year.

Gross profit. Our gross profit for products is primarily affected by our ability to reduce hardware costs faster than the decline in average overall system prices. We have been able to increase our product gross profit by reducing hardware costs through product redesign and volume discount pricing from our suppliers. We have also introduced new, lower cost hardware following these introductions, which has continued to improve our product gross profit. In general, product gross profit on our switches is greater than product gross profit on our IP phones. As the prices and costs of our hardware components have decreased over time, our software components, which have lower costs than our hardware components, have represented a greater percentage of our overall system sales. We consider our ability to monitor and manage these factors to be a key aspect of maintaining product gross profit and increasing our profitability.

Gross profit for support and services is slightly lower than gross profit for products, and is impacted primarily by personnel costs and labor related expenses. The primary goal of our support and services function is to ensure maximum customer satisfaction and our investments in support personnel and infrastructure are made with this goal in mind. We expect that as our installed enterprise customer base grows, we will be able to improve gross profit for support and services through economies of scale. However, the timing of additional investments in our support and services infrastructure could materially affect our cost of support and services revenue, both in absolute dollars and as a percentage of support and services revenue and total revenue, in any particular period.

Operating expense management. Our operating expenses are comprised primarily of compensation and benefits for our employees and, therefore, the increase in operating expenses has been primarily related to increases in our headcount. We intend to expand our workforce to support our anticipated growth, and therefore our ability to forecast and increase revenue is critical to managing our operating expenses and profitability.

Basis of Presentation

Revenue. We derive our revenue from sales of our IP telecommunications systems and related support and services. Our typical system includes a combination of IP phones, switches and software applications. Channel partners buy our products directly from us. Prices to a given channel partner for hardware and software products depend on that channel partner’s volume and customer satisfaction metrics, as well as our own strategic considerations. In circumstances where we sell directly to the enterprise customer in transactions that have been assisted by channel partners, we report our revenue net of any associated payment to the channel partners that assisted in such sales. This results in recognized revenue from a direct sale approximating the revenue that would have been recognized from a sale of a comparable system through a channel partner.

Support and services revenue primarily consists of post-contractual support, and to a lesser extent revenue from training services, professional services and installations that we perform. Post-contractual support includes software updates which grant rights to unspecified software license upgrades and maintenance releases issued during the support period. Post-contractual support also includes both Internet- and phone-based technical support. Post-contractual support revenue is recognized ratably over the contractual service period.

Cost of revenue. Cost of product revenue consists primarily of hardware costs, royalties and license fees for third-party software included in our systems, salary and related overhead costs of operations personnel, freight, warranty costs and provision for excess inventory. The majority of these costs vary with the unit volumes of product sold. Cost of support and services revenue consists of salary and related costs of personnel engaged in support and services, and are substantially fixed in the near term.

Research and development expenses. Research and development expenses primarily include personnel costs, outside engineering costs, professional services, prototype costs, test equipment, software usage fees and facilities expenses. Research and development expenses are recognized when incurred. We are devoting substantial resources to the development of additional functionality for existing products and the development of new products and related software applications.

 

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Sales and marketing expenses. Sales and marketing expenses primarily include personnel costs, sales commissions, travel, marketing promotional and lead generation programs, advertising, trade shows, demo equipment, professional services fees and facilities expenses. We plan to continue to invest in development of our distribution channel by increasing the size of our field sales force and the number of our channel partners to enable us to expand into new geographies, including Europe and Asia Pacific, and further increase our sales to large enterprises. In conjunction with channel growth, we plan to increase the investment in our training and support of channel partners to enable them to more effectively sell our products. We also plan to continue investing in our domestic and international marketing activities to help build brand awareness and create sales leads for our channel partners. We expect that sales and marketing expenses will increase in absolute dollars and remain our largest operating expense category.

General and administrative expenses. General and administrative expenses relate to our executive, finance, human resources, legal and information technology organizations. Expenses primarily include personnel costs, professional fees for legal, accounting, tax, compliance and information systems, travel, allowance for doubtful accounts, recruiting expense, software amortization costs, depreciation expense and facilities expenses. In addition, as we expand our business, we expect to increase our general and administrative expenses.

Other income, net. Other income (expense) primarily consists of interest earned on cash and short-term investments and other miscellaneous income (expenses).

Income tax provision. Income tax provision includes federal, state and foreign tax on our income. From inception through 2005, we accumulated substantial net operating loss and tax credit carryforwards. We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net operating loss carry-forwards and other tax credits measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.

We believe we have had multiple ownership changes, as defined under Section 382 of the Internal Revenue Code, due to significant stock transactions in previous years, which limits the realization of our net operating losses and tax credit carryforwards under Sections 382 and 383 of the Internal Revenue Code in future periods. Based on our final analysis performed in 2008, we believe the provisions of Section 382 results in the forfeiture of significant amount of federal and California net operating loss carry-forward and research and development tax credit carry-forwards.

Critical Accounting Policies and Estimates

We consider our accounting policies related to revenue recognition, allowance for doubtful accounts, stock-based compensation, inventory valuation and accounting for income tax to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to estimate doubtful accounts, the calculation of stock-based compensation expense, and how we value inventory. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates. Management believes there have been no significant changes during the three months ended September 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2009 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our 2009 Annual Report on Form 10-K, as amended by Form 10-K/A.

 

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Table of Contents

Results of Operations

The following table sets forth selected consolidated statements of operations data as a percentage of total revenue for each of the periods indicated.

 

     Three Months Ended
September 30,
 
     2009     2008  

Revenue:

    

Product

   80   84

Support and services

   20   16
            

Total revenue

   100   100

Cost of revenue:

    

Product

   28   28

Support and services

   8   8
            

Total cost of revenue

   36   36
            

Gross profit

   64   64

Operating expenses:

    

Research and development

   21   21

Sales and marketing

   35   31

General and administrative

   14   17
            

Total operating expenses

   70   69
            

Operating loss

   (6 )%    (5 )% 

Other income, net

   0   1
            

Loss before provision for income tax

   (6 )%    (4 )% 

Provision for income taxes

   0   (2 )% 
            

Net loss

   (6 )%    (6 )% 
            

Comparison of the three months ended September 30, 2009 and September 30, 2008

Revenue.

 

     Three months ended    Change  
     September 30,
2009
   September 30,
2008
  
         $     %  
     (in thousands, except percentages)  

Revenue

   $ 33,750    $ 35,860    $ (2,110   (6 )% 

The decrease was primarily attributable to decrease in sales of our products. Product revenue was $26.8 million in the three months ended September 30, 2009, a decrease of $3.2 million, or 11%, from $30.0 million in the same period of 2008. The decrease in product revenue was due to a decline in business from new customers mostly due to the economic downturn. This decrease was partially off-set by an increase of $1.1 million or 19% in support and services revenue which was $6.9 million in the three months ended September 30, 2009 compared to $5.8 million in the same period of 2008. The increase was attributable to revenue associated with post-contractual support contracts accompanying new system sales, post-contractual support contract renewals and increased revenue from training and installation services.

Cost of revenue and gross profit.

 

     Three months ended     Change  
     September 30,
2009
    September 30,
2008
   
       $     %  
     (in thousands, except percentages)  

Cost of revenue

   $ 12,117      $ 12,908      $ (791   (6 )% 

Gross profit

   $ 21,633      $ 22,952      $ (1,319   (6 )% 

Gross profit

     64.1     64.0    

        Support and services gross profit increased from 50.1% in the three months ended September 30, 2008 to 62.6% in the same period of 2009. In the three months ended September 30, 2009, support and services gross profit increased due to support and services revenue increasing by 18% and support and services cost decreasing by 11%, compared to the same period in 2008. The service costs decreased by 11% as the Company deployed employee resources to a lower cost region outside of our California headquarters office. Compensation for support and services employees, the largest category of support and service costs, decreased 12% in the three months ended September 30, 2009, as headcount decreased from 57 employees at September 30, 2008 to 53 employees at September 30, 2009. The increase in support and services gross profit was partially offset by decrease in product gross profit percent from 67% in the three months ended September 30, 2008 to 64% in the three months ended September 30, 2009. The decrease in product gross profit was attributable to a decline in average selling price of our ShoreGear switches of 15% and a decline in our IP Phones of 11%.

 

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Table of Contents

Operating expenses.

 

     Three months ended    Change  
     September 30,
2009
   September 30,
2008
  
         $     %  
     (in thousands, except percentages)  

Research and development

   $ 7,197    $ 7,794    $ (597   (8 )% 

Sales and marketing

   $ 12,017    $ 11,173    $ 844      8

General and administrative

   $ 4,651    $ 6,047    $ (1,396   (23 )% 

Research and development. The research and development expenses decreased by $0.6 million primarily due to consulting and temporary help, beta program and related expenses, and outside engineering expenses each decreased $0.2 million.

Sales and marketing . The increase in sales and marketing expenses is attributable to commissions, image & branding, travel, channel marketing and advertisement that accounted for $1.0 million, $0.4 million, $0.1 million, $0.1 million and $0.1 million, respectively, of the increase. This increase was partially offset by decrease in trade show expenses of $0.9 million.

General and administrative.  General and administrative expenses declined by $1.4 million primarily due to decrease in bad debt expenses, legal expenses, office rent and audit fees of $0.9 million, $0.4 million, $0.2 million and $0.1 million, respectively. The decrease was partially offset by increase in consulting and outside help and tax services of $0.2 million and $0.1 million, respectively.

Other income, net.

 

     Three months ended    Change  
     September 30,
2009
   September 30,
2008
  
         $     %  
     (in thousands, except percentages)  

Other income, net

   $ 128    $ 432    $ (304   (70 )% 

The decrease was primarily attributable to decrease in interest income by $0.5 million due to a decline in overall interest rates in the three months ended September 30, 2009 as compared to the same period of 2008. This was partially offset by a net increase in foreign currency exchange translation of $0.2 million in the three months ended September 30, 2009 compared to same period of 2008 due to higher fluctuation in foreign currency exchange rates in the three months ended September 30, 2008 that had resulted in foreign exchange translation losses. We expect that foreign currency exchange rates may be volatile in the near term.

Provision for income taxes.

 

     Three months ended    Change  
     September 30,
2009
   September 30,
2008
  
         $     %  
     (in thousands, except percentages)  

Tax provision

   $ 22    $ 608    $ (586   (96 )% 

Income tax provision. The income tax provision was $22,000 in the three months ended September 30, 2009 which is a decrease of $0.6 million from $0.6 million in the same period of 2008, primarily due to lower taxable income in foreign jurisdictions in the three months ended September 30, 2009 compared to same period of 2008.

Liquidity and Capital Resources

Balance Sheet and Cash Flows

The following table summarizes our cash and cash equivalents and short-term investments (in thousands):

 

     September 30,
2009
   June 30,
2009
   Change  
         $  

Cash and cash equivalents

   $ 82,192    $ 73,819    $ 8,373   

Short-term investments

     29,306      33,847      (4,541
                      

Total

   $ 111,498    $ 107,666    $ 3,832   
                      

As of September 30, 2009, our principal sources of liquidity consisted of cash and cash equivalents and short-term investments of $111.5 million and accounts receivable net of $19.0 million.

Our principal uses of cash historically have consisted of the purchase of finished goods inventory from our contract manufacturers, payroll and other operating expenses related to the development of new products and purchases of property and equipment.

 

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Table of Contents

We believe that our $111.5 million of cash and cash equivalents and short-term investments at September 30, 2009, together with cash flows from our operations will be sufficient to fund our operating requirements for at least 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and acquisition and licensing activities. We may enter into agreements relating to potential investments in, or acquisitions of, complementary businesses or technologies in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:

 

     Three Months Ended September 30,
     2009    2008
     (In thousands)

Cash provided by operating activities

   $ 5,247    $ 5,695

Cash provided by investing activities

   $ 3,029    $ 5,030

Cash provided by financing activities

   $ 97    $ 39

Cash flows from operating activities

Our cash flows from operating activities are significantly influenced by our cash expenditures to support the growth of our business in operating expense areas such as research and development, sales and marketing and administration. Our operating cash flows are also influenced by our working capital needs to support growth and fluctuations in inventory, accounts receivable, vendor accounts payable and other current assets and liabilities. We procure finished goods inventory from our contract manufacturers and typically pay them in 30 days. We extend credit to our channel partners and typically collect in 45 to 60 days. In some cases we also prepay for license rights to third-party products in advance of sales.

Net loss during the three months ended September 30, 2009 and 2008 included non-cash charges of $2.1 million and $2.8 million in stock-based compensation expense, respectively, bad debt expense of $0.1 million and $1.0 million, respectively, and $0.6 million and $0.5 million in depreciation and amortization of fixed assets, respectively.

Cash provided by operating activities during the three months ended September 30, 2009 also reflect net changes in operating assets and liabilities, which provided $4.5 million, consisting primarily of a significant decrease in accounts receivables of $2.4 million due to decrease in days sales outstanding (DSO), an increase in accrued employee compensation of $2.1 million, an increase in deferred revenue of $1.1 million, an increase of $1.0 million in accrued liabilities and other, partially offset by an increase in inventories of $1.3 million and a decrease in accounts payable of $0.9 million.

Cash provided by operating activities during the three months ended September 30, 2008 also reflect net changes in operating assets and liabilities, which provided $3.6 million, consisting primarily of a significant decrease in inventories of $2.0 million due to improved inventory turnover, an increase in deferred revenue of $1.9 million, decrease in accounts receivables of $0.8 million primarily due to a decrease in days sales outstanding, partially offset by a decrease in accounts payable of $0.8 million.

Cash flows from investing activities

We have classified our investment portfolio as “available for sale,” and our investments are made with a policy of capital preservation and liquidity as the primary objectives. We may hold investments in corporate bonds to maturity; however, we may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive or we are in need of cash.

Net cash provided by investing activities was $3.0 million and $5.0 million in the first three months of fiscal 2010 and 2009, respectively. Net cash provided by investing activities in the first three months of 2009 related to net sale/maturities of short-term investments of $4.6 million, partially off-set by purchase of fixed assets of $1.3 million. In the three months ended September 30, 2008, cash provided by investing activities primarily related to the short-term investments sold and matured (net).

Cash flows from financing activities

Net cash provided by financing activities was $97,000 and $39,000 in the three months ended September 30, 2009 and 2008, respectively, which represented cash generated from the exercise of common stock options.

 

20


Table of Contents

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements nor do we have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual obligations and commitments

The following table summarizes our contractual obligations as of September 30, 2009 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

          Payments Due by Period
     Total    Less than
1 year
   1-3
years
   3-5
years
   5 years and
after

Operating lease obligations

   $ 6,382    $ 1,428    $ 2,747    $ 2,207    $ —  

Non-cancelable purchase commitments for finished goods

     13,354      13,354      —        —        —  

Purchase commitments for software license use

     4,380      1,726      2,154      500      —  
                                  

Total contractual obligations

   $ 24,116    $ 16,508    $ 4,901    $ 2,707    $ —  
                                  

As of September 30, 2009, the Company's total amount of unrecognized tax benefit was approximately $1.7 million of which none, if recognized, would impact the effective tax rate as the Company has a valuation allowance on its carryforward attributes. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting ShoreTel, Inc., see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K, as amended by Form 10-K/A for the fiscal year ended June 30, 2009, which is incorporated herein by reference. Our exposure to market risk has not changed materially since June 30, 2009.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.

In connection with the restatement described in Note 13 to our unaudited condensed consolidated financial statements, our Chief Executive Officer and Chief Financial Officer determined that there was a material weakness in our internal control over financial reporting as of September 30, 2009 relating to the design of the controls over the calculation of stock-based compensation expense related to the application of the forfeiture rate.

Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Remedial Efforts to Address the Material Weakness

Subsequent to the identification of the material weakness described above, we initiated remediation measures to address the material weakness over the calculation of stock-based compensation expense related to the application of the forfeiture rate which includes upgrading to the most current version of the software during the second quarter of fiscal 2010, adding a control procedure to test the calculation of the third-party stock-based compensation system reports on a quarterly basis and timely review of the technical updates of the software.

 

21


Table of Contents

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

There were no material developments in our legal proceedings during the quarter ended September 30, 2009. The information set forth above under Part I, Item 1 note 11 contained in the “Notes to Consolidated Condensed Financial Statements” is incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

There has been no material change in our risk factors as described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K, as amended by Form 10-K/A for the fiscal year ended June 30, 2009.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Use of Proceeds from Public Offering of Common Stock

The effective date of the registration statement for our initial public offering was July 2, 2007. As of September 30, 2009, the proceeds from our initial public offering have been invested in cash, cash equivalents and short term investments. None of the use of the proceeds was made, directly or indirectly, to our directors, officers, or persons owning 10% or more of our common stock.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 

ITEM 5. OTHER INFORMATION

On November 4, 2009, the Board of Directors of ShoreTel approved an amendment to ShoreTel’s Bylaws (the “ Amendment ”), effective November 4, 2009. Article I, Section 1.11 of the Bylaws was amended to expand the disclosure required to be made by stockholders making nominations of persons for election as directors or proposals for consideration at an annual meeting of stockholders to include the following additional information:

(1) a description of any agreement, arrangement or understanding with respect to the nomination or proposal between or among such stockholder and the beneficial owner on whose behalf such nomination or proposal is made, any of their respective affiliates or associates, and any others acting in concert with any of the foregoing;

(2) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, warrants, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the stockholder’s notice by, or on behalf of, such stockholder and such beneficial owners, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder or such beneficial owner, with respect to shares of stock of ShoreTel;

(3) a representation that the stockholder is a holder of record of stock of ShoreTel entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination; and

(4) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of ShoreTel’s outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (y) otherwise to solicit proxies from stockholders in support of such proposal or nomination.

The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Bylaws, as amended, which are attached hereto as Exhibit 3.01 and incorporated by reference herein.

 

ITEM 6. EXHIBITS

See Index to Exhibits following the signature page to this Form 10-Q, which is incorporated by reference herein.

 

22


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 9, 2009

 

ShoreTel, Inc.
By:  

/s/    M ICHAEL E. H EALY        

 

Michael E. Healy

Chief Financial Officer

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

  

Exhibit Title

  3.01       Third Amended and Restated Bylaws
31.1(1)    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2(1)    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1(1)    Section 1350 Certification of Chief Executive Officer.
32.2(1)    Section 1350 Certification of Chief Financial Officer.

 

(1) This certification accompanying this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

 

(b) Financial Statement Schedules.

All schedules have been omitted because they are either inapplicable or the required information has been given in the annual consolidated financial statements or the notes thereto.

 

24

Exhibit 3.01

THIRD AMENDED AND RESTATED

BYLAWS

OF

SHORETEL, INC.

(a Delaware corporation)

As Adopted January 19, 2007

Amended as of July 9, 2007 and November 4, 2009


TABLE OF CONTENTS

 

         PAGE
Article I - STOCKHOLDERS

Section 1.1:

  Annual Meetings    1

Section 1.2:

  Special Meetings    1

Section 1.3:

  Notice of Meetings    1

Section 1.4:

  Adjournments    1

Section 1.5:

  Quorum    2

Section 1.6:

  Organization    2

Section 1.7:

  Voting; Proxies    2

Section 1.8:

  Fixing Date for Determination of Stockholders of Record    2

Section 1.9:

  List of Stockholders Entitled to Vote    3

Section 1.10:

  Inspectors of Elections    3

Section 1.11:

  Notice of Stockholder Business; Nominations    4
Article II - BOARD OF DIRECTORS   

Section 2.1:

  Number; Qualifications    7

Section 2.2:

  Election; Resignation; Removal; Vacancies    8

Section 2.3:

  Regular Meetings    8

Section 2.4:

  Special Meetings    8

Section 2.5:

  Remote Meetings Permitted    8

Section 2.6:

  Quorum; Vote Required for Action    8

Section 2.7:

  Organization    8

Section 2.8:

  Written Action by Directors    8

Section 2.9:

  Powers    9

 

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TABLE OF CONTENTS (cont’d)

 

         PAGE

Section 2.10:

  Compensation of Directors    9
Article III - COMMITTEES   

Section 3.1:

  Committees    9

Section 3.2:

  Committee Rules    9
Article IV - OFFICERS   

Section 4.1:

  Generally    9

Section 4.2:

  Chief Executive Officer    10

Section 4.3:

  Chairperson of the Board    10

Section 4.4:

  Lead Independent Director    10

Section 4.5:

  President    11

Section 4.6:

  Vice President    11

Section 4.7:

  Chief Financial Officer    11

Section 4.8:

  Treasurer    11

Section 4.9:

  Controller or Principal Accounting Officer    11

Section 4.10:

  Secretary    11

Section 4.11:

  Delegation of Authority    12

Section 4.12:

  Removal    12
Article V - STOCK   

Section 5.l:

  Certificates, Uncertificated Shares    12

Section 5.2:

  Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates    12

Section 5.3:

  Other Regulations    12

 

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TABLE OF CONTENTS (cont’d)

 

         PAGE
Article VI - INDEMNIFICATION

Section 6.1:

  Indemnification of Officers and Directors    13

Section 6.2:

  Advance of Expenses    13

Section 6.3:

  Non-Exclusivity of Rights    13

Section 6.4:

  Indemnification Contracts    14

Section 6.5:

  Nature of Rights    14
Article VII - NOTICES   

Section 7.l:

  Notice    14

Section 7.2:

  Waiver of Notice    15
Article VIII - INTERESTED DIRECTORS   

Section 8.1:

  Interested Directors; Quorum    15

Section 8.2:

  Quorum    16
Article IX - MISCELLANEOUS   

Section 9.1:

  Fiscal Year    16

Section 9.2:

  Seal    16

Section 9.3:

  Form of Records    16

Section 9.4:

  Reliance Upon Books and Records    16

Section 9.5:

  Certificate of Incorporation Governs    16

Section 9.6:

  Severability    16
Article X - AMENDMENT   

Section 10.1:

  Amendments    17

 

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THIRD AMENDED AND RESTATED BYLAWS

OF

SHORETEL, INC.

(a Delaware corporation)

As Adopted July 9, 2007

Amended as of July 9, 2007 and November 4, 2009

ARTICLE I

STOCKHOLDERS

Section 1.1 : Annual Meetings . An annual meeting of stockholders shall be held for the election of directors at such date and time as the Board of Directors of the Corporation (the “ Board ”) shall each year fix. The meeting may be held either at a place, within or without the State of Delaware as permitted by the Delaware General Corporation Law (the “ DGCL ”), or by means of remote communication as the Board in its sole discretion may determine. Any proper business may be transacted at the annual meeting.

Section 1.2 : Special Meetings . Special meetings of stockholders for any purpose or purposes may be called at any time by the Board acting pursuant to a resolution adopted by a majority of the “ Whole Board ,” which shall mean the total number of authorized directors, whether or not there exist any vacancies in previously authorized directorships. Special meetings may not be called by any other person or persons. The special meeting may be held either at a place, within or without the State of Delaware, or by means of remote communication as the Board in its sole discretion may determine.

Section 1.3 : Notice of Meetings . Notice of all meetings of stockholders shall be given in writing or by electronic transmission in the manner provided by law (including, without limitation, as set forth in Section 7.1(b) of these Bylaws) stating the date, time and place, if any, of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation of the Corporation (the “ Certificate of Incorporation ”), such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting.

Section 1.4 : Adjournments . The chairperson of the meeting shall have the power to adjourn the meeting to another time, date and place (if any). Any meeting of stockholders may adjourn from time to time, and notice need not be given of any such adjourned meeting if the time, date and place (if any) thereof and the means of remote communications (if any) by which stockholders and proxy holders may be deemed to be present in person and vote at such

 

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adjourned meeting are announced at the meeting at which the adjournment is taken; provided , however , that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, then a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. To the fullest extent permitted by law, the Board may postpone or reschedule any previously scheduled special or annual meeting of stockholders before it is to be held, in which case notice shall be provided to the stockholders of the new date, time and place, if any, of the meeting as provided in Section 1.3 above.

Section 1.5 : Quorum . At each meeting of stockholders the holders of a majority of the voting power of the shares of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, unless otherwise required by applicable law. If a quorum shall fail to attend any meeting, the chairperson of the meeting may adjourn the meeting. Shares of the Corporation’s stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation), shall neither be entitled to vote nor be counted for quorum purposes; provided , however , that the foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporation’s stock held by it in a fiduciary capacity and to count such shares for purposes of determining a quorum.

Section 1.6 : Organization . Meetings of stockholders shall be presided over by such person as the Board may designate, or, in the absence of such a person, the Chairperson of the Board, or, in the absence of such person, the Chief Executive Officer of the Corporation, or, in the absence of such person, such person as may be chosen by the holders of a majority of the voting power of the shares entitled to vote who are present, in person or by proxy, at the meeting. Such person shall be chairperson of the meeting and, subject to Section 1.11 hereof, shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her to be in order. The Secretary of the Corporation shall act as secretary of the meeting, but in such person’s absence the chairperson of the meeting may appoint any person to act as secretary of the meeting.

Section 1.7 : Voting; Proxies . Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Unless otherwise provided by applicable law, the Certificate of Incorporation or these Bylaws, every matter other than the election of directors shall be decided by the affirmative vote of the holders of a majority of the voting power of the shares of stock entitled to vote on such matter that are present in person or represented by proxy at the meeting and are voted for or against the matter.

Section 1.8 : Fixing Date for Determination of Stockholders of Record . In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or entitled to receive payment of any dividend or other distribution or allotment of

 

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any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, unless otherwise required by law, the Board may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed by the Board, then the record date shall be as provided by applicable law. To the fullest extent permitted by law, a determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided , however , that the Board may fix a new record date for the adjourned meeting, in which case such new record date shall apply to such adjourned meeting.

Section 1.9 : List of Stockholders Entitled to Vote . A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either on a reasonably accessible electronic network as permitted by law (provided that the information required to gain access to the list is provided with the notice of the meeting) or during ordinary business hours at the principal place of business of the Corporation. If the meeting is held at a location where stockholders may attend in person, the list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present at the meeting. If the meeting is held solely by means of remote communication, then the list shall be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access the list shall be provided with the notice of the meeting.

Section 1.10 : Inspectors of Elections .

(a) Applicability . Unless otherwise required by the Certificate of Incorporation or required by the DGCL, the following provisions of this Section 1.10 shall apply only if and when the Corporation has a class of voting stock that is: (i) listed on a national securities exchange; (ii) authorized for quotation on an interdealer quotation system of a registered national securities association; or (iii) held of record by more than two thousand (2,000) stockholders; in all other cases, observance of the provisions of this Section 1.10 shall be optional, and at the discretion of the Board.

(b) Appointment . The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting.

(c) Inspector’s Oath . Each inspector of election, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability.

 

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(d) Duties of Inspectors . At a meeting of stockholders, the inspectors of election shall (i) ascertain the number of shares outstanding and the voting power of each share, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.

(e) Opening and Closing of Polls . The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced by the chairperson of the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise.

(f) Determinations . In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies in accordance with any information provided pursuant to Section 211(a)(2)(B) of the DGCL, or Sections 211(e) or 212(c)(2) of the DGCL, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.10 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors’ belief that such information is accurate and reliable.

Section 1.11 : Notice of Stockholder Business; Nominations .

(a) Annual Meeting of Stockholders .

(i) Nominations of persons for election to the Board and the proposal of business to be considered by the stockholders shall be made at an annual meeting of stockholders (A) pursuant to the Corporation’s notice of such meeting, (B) by or at the direction of the Board or (C) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 1.11, who is entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 1.11.

(ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of subparagraph (a)(i) of this Section 1.11:

(1) the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation;

 

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(2) such other business must otherwise be a proper matter for stockholder action;

(3) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the Corporation with a Solicitation Notice, as that term is defined in this Section, such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the Corporation’s voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the Corporation’s voting shares reasonably believed by such stockholder or beneficial holder to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice; and

(4) if no Solicitation Notice relating thereto has been timely provided pursuant to this Section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section.

To be timely, a stockholder’s notice described above in this subparagraph (ii) must be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the seventy-fifth (75th) day nor earlier than the close of business on the one hundred and fifth (105th) day prior to the first anniversary of the preceding year’s annual meeting (except in the case of the 2008 annual meeting, for which such notice shall be timely if delivered in the same time period as if such meeting were a special meeting governed by subparagraph (b) of this Section 1.11); provided , however , that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered no earlier than the close of business on the one hundred and fifth (105th) day prior to such annual meeting and no later than the close of business on the later of the seventy-fifth (75th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such annual meeting is first made by the Corporation. Such stockholder’s notice shall set forth:

(A) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected;

(B) as to any other business that the stockholder proposes to bring before the annual meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made;

 

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(C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, (2) the class and number of shares of the Corporation that are owned beneficially and held of record by such stockholder and such beneficial owner, (3) a description of any agreement, arrangement or understanding with respect to the nomination or proposal between or among such stockholder and such beneficial owner, any of their respective affiliates or associates, and any others acting in concert with any of the foregoing, (4) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, warrants, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the stockholder’s notice by, or on behalf of, such stockholder and such beneficial owners, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder or such beneficial owner, with respect to shares of stock of the Corporation, (5) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (6) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of a proposal, at least the percentage of the Corporation’s voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the Corporation’s voting shares to elect such nominee or nominees (an affirmative statement of such intent being, a “ Solicitation Notice ”). If requested by the Corporation, the information required under clauses (2), (3) and (4) of this subparagraph (ii)(C) shall be supplemented by such shareholder and beneficial owner, if any, not later than 10 days after the record date for the meeting to disclose such information as of the record date.

(iii) Notwithstanding anything in the second sentence of subparagraph (a)(ii) of this Section 1.11 to the contrary, in the event that the number of directors to be elected to the Board is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board at least seventy-five (75) days prior to the first anniversary of the preceding year’s annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy-five (75) days prior to such annual meeting), a stockholder’s notice required by this Section 1.11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation no later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation.

(b) Special Meetings of Stockholders . Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of such meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of such meeting (i) by or at the direction of the Board or (ii) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of

 

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the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by subparagraph (a)(ii) of this Section 1.11 shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation no earlier than the one hundred fifth (105th) day prior to such special meeting and no later than the close of business on the later of the seventy-fifth (75th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting.

(c) General .

(i) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.11 shall be eligible to serve as members of the Board and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.11. Except as otherwise provided by law or these Bylaws, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.11 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded.

(ii) For purposes of this Section 1.11, the term “ public announcement ” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to section 13, 14 or 15(d) of the Exchange Act.

(iii) Notwithstanding the foregoing provisions of this Section 1.11, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.11 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

ARTICLE II

BOARD OF DIRECTORS

Section 2.1 : Number; Qualifications . The Board shall consist of one or more members. The initial number of directors shall be eight (8) and thereafter, unless otherwise required by law, shall be fixed from time to time as set forth in the Certificate of Incorporation. No decrease in the authorized number of directors constituting the Board shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation.

 

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Section 2.2 : Election; Vacancies . The directors shall be divided, with respect to the time for which they severally hold office, into classes as provided in the Certificate of Incorporation, and vacancies occurring in the Board and any newly created directorships resulting from any increase in the authorized number of directors shall be filled, as provided in the Certificate of Incorporation.

Section 2.3 : Regular Meetings . Regular meetings of the Board may be held at such places, within or without the State of Delaware, and at such times as the Board may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board.

Section 2.4 : Special Meetings . Special meetings of the Board may be called by the Chairperson of the Board, the Lead Independent Director, the Chief Executive Officer, or a majority of the members of the Board then in office and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally, in writing or by electronic transmission (including electronic mail), by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, mailgram, facsimile, electronic mail or other means of electronic transmission. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting.

Section 2.5 : Remote Meetings Permitted . Members of the Board, or any committee of the Board, may participate in a meeting of the Board or such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to conference telephone or other communications equipment shall constitute presence in person at such meeting.

Section 2.6 : Quorum; Vote Required for Action . At all meetings of the Board a majority of the Whole Board shall constitute a quorum for the transaction of business. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date or time without further notice thereof. Except as otherwise provided herein or in the Certificate of Incorporation, or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board.

Section 2.7 : Organization . Meetings of the Board shall be presided over by the Chairperson of the Board, or in such person’s absence by the Chief Executive Officer, or in such person’s absence, by a chairperson chosen at the meeting. The Secretary shall act as secretary of the meeting, but in such person’s absence the chairperson of the meeting may appoint any person to act as secretary of the meeting.

Section 2.8 : Written Action by Directors . Any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee, respectively. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

 

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Section 2.9 : Powers . The Board may, except as otherwise required by law or the Certificate of Incorporation, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.

Section 2.10 : Compensation of Directors . Members of the Board, as such, may receive, pursuant to a resolution of the Board, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board.

ARTICLE III

COMMITTEES

Section 3.1 : Committees . The Board may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting of such committee who are not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of members of the Board) expressly required by the DGCL to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation.

Section 3.2 : Committee Rules . Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business not in conflict with the provisions of this Article III. In the absence of such rules each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these Bylaws.

ARTICLE IV

OFFICERS

Section 4.1 : Generally . The officers of the Corporation shall consist of a Chief Executive Officer (who may be the Chairperson of the Board) and/or a President, a Secretary, a Treasurer and may consist of such other officers, including a Chairperson of the Board, Chief Financial Officer, one or more Vice Presidents, and a Controller, as may from time to time be appointed by the Board. All officers shall be elected by the Board; provided , however , that the Board may empower the Chief Executive Officer of the Corporation to appoint officers other

 

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than the Chairperson of the Board, the Chief Executive Officer, the President, the Chief Financial Officer, the Treasurer or the Controller. Each officer shall hold office until such person’s successor is appointed or until such person’s earlier resignation, death or removal. Any number of offices may be held by the same person. Any officer may resign at any time upon written notice to the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board.

Section 4.2 : Chief Executive Officer . Subject to the control of the Board and such supervisory powers, if any, as may be given by the Board, the powers and duties of the Chief Executive Officer of the Corporation are:

(a) To act as the general manager and, subject to the control of the Board, to have general supervision, direction and control of the business and affairs of the Corporation;

(b) Subject to Article I, Section 1.6, to preside at all meetings of the stockholders;

(c) Subject to Article I, Section 1.2, to call special meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper; and

(d) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation.

The President shall be the Chief Executive Officer of the Corporation unless the Board shall designate another officer to be the Chief Executive Officer. If there is no President, and the Board has not designated any other officer to be the Chief Executive Officer, then the Chairperson of the Board shall be the Chief Executive Officer.

Section 4.3 : Chairperson of the Board . Subject to Article I, Section 2.7, the Chairperson of the Board shall have the power to preside at all meetings of the Board and shall have such other powers and duties as provided in these Bylaws and as the Board may from time to time prescribe.

Section 4.4. Lead Independent Director . The Board may, in its discretion elect a Lead Independent Director from among its members that are “Independent Directors” (as defined below). He or she shall preside at all meetings at which the Chaiperson of the Board is not present and shall exercise such other powers and duties as may from time to time be assigned to him or her by the Board or as prescribed by these Bylaws. For purposes of these Bylaws, “Independent Director” has the meaning ascribed to such term under the rules of the Nasdaq Stock Market or other stock exchange upon which the Corporation’s common stock is primarily traded.

 

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Section 4.5 : President . The President shall be the Chief Executive Officer of the Corporation unless the Board shall have designated another officer as the Chief Executive Officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board to the Chairperson of the Board, and/or to any other officer, the President shall have the responsibility for the general management and control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are commonly incident to the office of President or that are delegated to the President by the Board.

Section 4.6 : Vice President . Each Vice President shall have all such powers and duties as are commonly incident to the office of Vice President, or that are delegated to him or her by the Board or the Chief Executive Officer. A Vice President may be designated by the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officer’s absence or disability.

Section 4.7 : Chief Financial Officer . The Chief Financial Officer shall be the Treasurer of the Corporation unless the Board shall have designated another officer as the Treasurer of the Corporation. The Chief Financial Officer shall be the principal accounting officer of the Corporation unless the Board shall have designated a Contoller or another officer as the principal financial officer of the Corporation. Subject to the direction of the Board and the Chief Executive Officer, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of Chief Financial Officer.

Section 4.8 : Treasurer . The Treasurer shall have custody of all monies and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of Treasurer, or as the Board or the Chief Executive Officer may from time to time prescribe.

Section 4.8 : Controller or Principal Accounting Officer . The Controller or other officer designated by the Board shall be the principal accounting officer of the Corporation and, subject to the direction of the Chief Financial Officer, shall be responsible for maintaining the accounting records of the Corporation and for preparing necessary financial reports and statements, and the Controller shall properly account for all monies and obligations due the Corporation and all properties, assets, and liabilities of the Corporation. The Controller shall also perform such other duties and have such other powers as are commonly incident to the office of Controller, or as the Board or the Chief Financial Officer may from time to time prescribe, and shall exercise the powers of the Chief Financial Officer during his absence or inability to act.

Section 4.10 : Secretary . The Secretary shall issue or cause to be issued all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders and

 

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the Board. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of Secretary, or as the Board or the Chief Executive Officer may from time to time prescribe.

Section 4.11 : Delegation of Authority . The Board may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.

Section 4.12 : Removal . Any officer of the Corporation shall serve at the pleasure of the Board and may be removed at any time, with or without cause, by the Board; provided that if the Board has empowered the Chief Executive Officer to appoint any Vice Presidents of the Corporation, then such Vice Presidents may be removed by the Chief Executive Officer. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation.

ARTICLE V

STOCK

Section 5.1 : Certificates, Uncertificated Shares . The shares of capital stock of the Corporation shall be represented by certificates, provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock may be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation (or the transfer agent or registrar, as the case may be). Notwithstanding the adoption of such resolution by the Board, every holder of stock represented by certificates and, upon the request, a holder of uncertificated shares shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairperson or Vice-Chairperson of the Board, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. If such holder of uncertificated shares elects to receive a certificate, the Corporation (or the transfer agent or registrar, as the case may be) shall cease to provide annual statements indicating such holder’s holding of shares in the Corporation. Any or all of the signatures on the certificate may be a facsimile.

Section 5.2 : Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates . The Corporation may issue a new certificate of stock, or uncertificated shares, in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

Section 5.3 : Other Regulations . The issue, transfer, conversion and registration of stock certificates shall be governed by such other regulations as the Board may establish.

 

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ARTICLE VI

INDEMNIFICATION

Section 6.1 Indemnification of Officers and Directors . Each person who was or is made a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “ Proceeding ”), by reason of the fact that such person (or a person of whom such person is the legal representative), is or was a member of the Board or officer of the Corporation or a Reincorporated Predecessor (as defined below) or is or was serving at the request of the Corporation or a Reincorporated Predecessor as a member of the board of directors, officer or trustee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (for purposes of this Article VI, an “ Indemnitee ”), shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the DGCL as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expenses, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith. Notwithstanding the foregoing, the Corporation shall indemnify any such Indemnitee seeking indemnity in connection with a Proceeding (or part thereof) initiated by such Indemnitee only if such Proceeding (or part thereof) was authorized by the Board or such indemnification is authorized by an agreement approved by the Board. As used herein, the term the “ Reincorporated Predecessor ” means a corporation that is merged with and into the Corporation in a statutory merger where (a) the Corporation is the surviving corporation of such merger; (b) the primary purpose of such merger is to change the corporate domicile of the Reincorporated Predecessor to Delaware.

Section 6.2 : Advance of Expenses . The Corporation shall pay all expenses (including attorneys’ fees) reasonably incurred by such an Indemnitee in defending any such Proceeding as they are incurred in advance of its final disposition; provided , however , that (a) if the DGCL then so requires, the payment of such expenses incurred by such an Indemnitee in advance of the final disposition of such Proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it should be determined ultimately by final judicial decision from which there is no appeal that such Indemnitee is not entitled to be indemnified under this Article VI or otherwise; and (b) the Corporation shall not be required to advance any expenses to a person against whom the Corporation directly brings a claim, in a Proceeding, alleging that such person has breached such person’s duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction.

Section 6.3 : Non-Exclusivity of Rights . The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, indemnification contract or other agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI.

 

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Section 6.4 : Indemnification Contracts . The Board is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification or advancement rights to such person. Such rights may be greater than those provided in this Article VI.

Section 6.5: Nature of Rights . The rights conferred upon Indemnitees in this Article VI shall be contract rights and such rights shall continue as to an Indemnitee who has ceased to be a director, officer or trustee and shall inure to the benefit of the Indemnitee’s heirs, executors and administrators. Any amendment, repeal or modification of any provision of this Article VI that adversely affects any right of an Indemnitee or an Indemnitee’s successors shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification.

ARTICLE VII

NOTICES

Section 7.1 : Notice .

(a) Except as otherwise specifically required in these Bylaws (including, without limitation, Section 7.1(b) below) or by law, all notices required to be given pursuant to these Bylaws shall be in writing and may, (a) in every instance in connection with any delivery to a member of the Board, be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid telegram, cablegram, overnight express courier, facsimile, electronic mail or other form of electronic transmission and (b) be effectively be delivered to a stockholder when given by hand delivery, by depositing such notice in the mail, postage prepaid or, if specifically consented to by the stockholder as described in Section 7.1(b) of this Article VII by sending such notice by telegram, cablegram, facsimile, electronic mail or other form of electronic transmission. Any such notice shall be addressed to the person to whom notice is to be given at such person’s address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person, (ii) in the case of delivery by mail, upon deposit in the mail, (iii) in the case of delivery by overnight express courier, when dispatched, and (iv) in the case of delivery via telegram, cablegram, facsimile, electronic mail or other form of electronic transmission, when dispatched.

(b) Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the DGCL, the Certificate of Incorporation, or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given in

 

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accordance with Section 232 of the DGCL. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this Section 7.1(b) shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder.

(c) An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given in writing or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

Section 7.2 : Waiver of Notice . Whenever notice is required to be given under any provision of the DGCL, the Certificate of Incorporation or these Bylaws, a written waiver of notice, signed by the person entitled to notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any waiver of notice.

ARTICLE VIII

INTERESTED DIRECTORS

Section 8.1 : Interested Directors . No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof that authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board, a committee thereof, or the stockholders.

 

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Section 8.2 : Quorum . Interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction.

ARTICLE IX

MISCELLANEOUS

Section 9.1 : Fiscal Year . The fiscal year of the Corporation shall be determined by resolution of the Board.

Section 9.2 : Seal . The Board may provide for a corporate seal, which may have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board.

Section 9.3 : Form of Records . Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on or by means of, or be in the form of, diskettes, compact disks or any other information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to any provision of the DGCL.

Section 9.4 : Reliance upon Books and Records . A member of the Board, or a member of any committee designated by the Board shall, in the performance of such person’s duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees of the Board, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.

Section 9.5 : Certificate of Incorporation Governs . In the event of any conflict or inconsistency between the provisions of the Certificate of Incorporation and these Bylaws, the provisions of the Certificate of Incorporation shall govern and prevail.

Section 9.6 : Severability . If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation, that are not themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation) shall remain in full force and effect.

 

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ARTICLE X

AMENDMENT

Section 10.1 : Amendments . Notwithstanding any other provision of these Bylaws, any amendment or repeal of these Bylaws shall require the approval of the Board or the stockholders of the Corporation as provided in the Certificate of Incorporation.

 

 

 

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CERTIFICATION OF

THIRD AMENDED AND RESTATED BYLAWS

OF

SHORETEL, INC.

(a Delaware corporation)

KNOW ALL BY THESE PRESENTS:

I, Ava M. Hahn, certify that I am Secretary of ShoreTel, Inc., a Delaware corporation (the “ Corporation ”), that I am duly authorized to make and deliver this certification, that the attached Bylaws are a true and complete copy of the Third Amended and Restated Bylaws of the Corporation in effect as of the date of this certificate.

 

Dated: November 4, 2009      
     

/s/ Ava M. Hahn

      Ava M. Hahn, Secretary

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. Combs, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ShoreTel, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2009  

/s/ John W. Combs

 

John W. Combs

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael E. Healy, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ShoreTel, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2009  

/s/ Michael E. Healy

 

Michael E. Healy

Chief Financial Officer

(Principal Accounting and Financial Officer)

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. Combs, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of ShoreTel, Inc. for the quarter ended September 30, 2009 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of ShoreTel, Inc.

 

Dated: November 9, 2009   By:  

/s/ John W. Combs

  Name:   John W. Combs
  Title:  

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by referenced into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made on or before or after the date of this Report), irrespective at any general incorporation language contained in such filing.

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael E. Healy, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of ShoreTel, Inc. for the quarter ended September 30, 2009 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of ShoreTel, Inc.

 

Dated: November 9, 2009   By:  

/s/ Michael E. Healy

  Name:   Michael E. Healy
  Title:  

Chief Financial Officer

(Principal Accounting and Financial Officer)

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by referenced into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made on or before or after the date of this Report), irrespective at any general incorporation language contained in such filing.